Educational Articles

Dow-30 Earnings: Wal-Mart Stores - First Quarter 2012

Kevin Downing
| May 17, 2012

Wal-Mart (WMT - Free Wal-Mart Stock Report), a Dow-30 component and the world's largest retailer, has recorded better-than-expected results for the fiscal first quarter (ended April 30th). Earnings per share of $1.09 were above the high end of management's guidance range and our estimate, both $1.06, and marked a 12.4% gain from the year-earlier figure. Revenues, at $112.3 billion, represented an 8.6% advance year over year. The stock is up nicely on the news.

Wal-Mart's U.S. operation posted sales growth of 2.6% (3.0% excluding the negative effect of gas prices), much better than management's forecast of flat to up 2.0%. The average transaction amount was up 1.5%. Traffic remained positive for a second straight quarter after years of declines, increasing 1.1%. We attribute part of the traffic gain to an expanded assortment in general merchandise categories like sporting goods, toys, outdoor, and home. Other key drivers were lower prices in food and consumables, locally relevant merchandise, and better on-shelf availability.

All departments had positive comps with the exception of entertainment, which continues to suffer from TV and gaming price deflation. A renewed focus on basic apparel appears to finally be gaining traction, as the mid-single-digit positive comp was the first such showing in six years. Elsewhere, unseasonably warm weather pulled forward sales of outdoor merchandise.

Efforts to beat competitors' prices resulted in a gross profit decline of 24 basis points, similar to the 30 basis point drop in the January period. Still, the logistics team did an admirable job lowering the cost per case shipped by 5.4%, achieved through warehouse productivity efforts and streamlined transportation activity. In aggregate, Wal-Mart plans to lower prices by $2.0 billion over the next few years, which is liable to narrow the gross margin further in the coming quarters.

The company's operating expenses declined 40 basis points, which is not surprising considering its strong track record. We credit more efficient labor scheduling, increased self checkout utilization, improved worker productivity, and better inventory management for the savings. We expect part of the expense reduction to filter down to consumers through lower prices. In all likelihood, Wal-Mart will reach its goal of narrowing the ratio of operating expenses to revenues by 100 basis points over the next five years.

On a macroeconomic level, inflation moderated slightly to 3.0%. Customers are still trading down to lower price points and smaller pack sizes to avoid the price increases Wal-Mart was unable to offset. These activities reduced the net inflation impact by around one percentage point.

On the global stage, international sales were up 15.0% and operating income rose 21.0% (16.0% on a constant currency basis). The company still has room for improvement in Brazil, where it’s rolling out the ''everyday low price'' and “everyday low cost” strategies. China is also an area of focus. In general, the company is applying inventory management and staffing ''best practices'' internationally.

CEO Mike Duke touched on Wal-Mart de Mexico's alleged violation of anti-bribery laws, saying an investigation is ongoing. No time frame for completion was given, and it may take months before details are released. We believe significant fines, slower international expansion, and management and board member shakeups are possible, which may well pressure the share price. For now, investors seem more focused on the rebounding fundamentals of the domestic unit.

Management is calling for July-quarter comparable growth of 1.0% to 3.0%, versus last year's negative 0.9%. Sales are expected to rise 5.0%-7.0%, while earnings should reach $1.13-$1.18 a share. In light of the company's solid April-period performance, we are raising our full-year bottom-line estimate by $0.05, to $4.95 a share.

About The Company:Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,029 supercenters (includes sizable grocery departments), 629 discount stores, 611 Sam’s Clubs, and 210 Neighborhood Markets in the U.S., plus 5,651 foreign stores, mainly in Latin America, with the balance in Asia, Canada, and the U.K. The company operated 1.037 billion square feet of total store space at the end of its 2011 fiscal year. Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 55% U.S. sales in 2011, while sales per square foot were about $430.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.